The main difference between the 1946 25/75 and the spreadsheet default 1972 50/50 backtest withdrawal stream shapes is the ending. 1946 ends up low while 1972 ends up high. I call this "the luck of the draw".

Knowing in advance how the portfolio will fare over the next 35 years requires a crystal ball which I don't possess, nor does VPW, unfortunately.

How could a withdrawal method distinguish between the necessity to cut withdrawals in inflation-adjusted terms, in 1948 but not in 1974, without a crystal ball? I just don't see how that could be done.

But, the nice thing is that one can actually go and buy lifelong stable inflation-indexed income. Inflation-indexed SPIAs exist and can be bought. Social Security (SS) exists and can be maximized by delaying it to age 70.

And, best of all, one can mostly address the need for relatively stable income and the need for enough liquidity by combining VPW withdrawals from a balanced portfolio with lifelong stable income (SS, pension if any, and inflation-indexed SPIA if necessary).

The big difference is that real stock market returns in 1946-1955 were 11% versus the ~2% from 1972-1981. 46 and 47 were bad
but the years after were great. Inflation was a bit of an issue but it wasn't quite as bad as the 70s.

There was no need to cut spending in 1972 despite the market crash. You could have taken out 4.5% and been fine. VPW cutting spending was an over reaction.That is the whole flaw in the system. It is easy to go conservative and never run out of money. But that isn't a free choice. You give up spending in your prime to get safety later. VPW opts for too much safety for me.

You can offload risk but it costs you money.. You get about 4% for a joint SPIA at 65 and will have 0 dollars when you die versus investing it, getting 4% and having 2x the amount of real money that you started with most of the time but you run the risk of going broke. Not sure I will ever be that risk adverse. Note the numbers improve a lot if you wait to 80+ as the opportunity cost time frame goes down.

Mixing in other sources of income doesn't really change the problem. Heck I would say they make VPW even worse. If you meet your needs with a SPIAs/SS, you shouldn't be cutting spending in down turns. You should be spending 5%+ or so and not worrying about if you run out of money in 15-20 years.

In the end you always have to balance out your risks and fears to come up with a solution to that works for you. There is no perfect scheme that will give you even spending, maximize your spending, and never have the money run out. You have to pick and choose.

There was no need to cut spending in 1972 despite the market crash. You could have taken out 4.5% and been fine. VPW cutting spending was an over reaction.That is the whole flaw in the system. It is easy to go conservative and never run out of money. But that isn't a free choice. You give up spending in your prime to get safety later. VPW opts for too much safety for me.

What I'm trying to say is that in 1974-1975 the investor did not know that it was OK to continue with higher withdrawals because 1981 would prove to be the start of an exceptional bull market, allowing one to spend (almost) freely during the market downturn with 20% inflation of the mid 1970s.

So, me, I'm fine with a conservative withdrawal method such as VPW which will protect the portfolio by adapting withdrawals to effective market returns. I know that I can reduce the nominal volatility of the portfolio with nominal bonds, and the inflation-adjusted volatility with inflation-indexed bonds (such as TIPS). Of course, the more bonds, the lower the withdrawal percentage; nothing is free.

Combining VPW withdrawals from a balanced portfolio with lifelong stable inflation-indexed income might not be perfect, but it's a good enough retirement approach for me.

But many folks (most?) don't want to take that high a risk of running out of money.

Research has shown that retirees are more worried about running out of money than dying, a completely illogical concern but nonetheless a very real one.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

I "believe in" the 4% rule as a very good approximation of how proceed to draw on your stash. But I also take a few additional things into account in my planning.

First, I can meet about 25-33% of my spending needs from SS. Even when I have to take >4% from my 401k due to RMD's, I don't need to spend it all to meet my spending needs. Some of that money gets reinvested.

Second, I consider the risk that long-term care (LTC) will sharply reduce or deplete my resources. To reduce that risk, I buy long-term care insurance (LTCI). That eats into my annual income. But LTCI is "wealth insurance," reducing the chances that I will have to exhaust my own resources due to disability.

Third, I try to live from year to year on the accumulation that I have in tax deferred accounts, while keeping a safety stash of (conservatively invested) cash outside of these accounts. Thus I play a kind of mind-game with myself. The money set aside is not something that I count as the funds from which I'm drawing my annual budget. But it's there in an emergency -- another type of insurance policy.

Last edited by Garco on Thu Nov 16, 2017 11:38 pm, edited 1 time in total.

But many folks (most?) don't want to take that high a risk of running out of money.

Research has shown that retirees are more worried about running out of money than dying, a completely illogical concern but nonetheless a very real one.

Why is it an illogical concern - running out of money is something they will have to suffer through whereas death they won't.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

First, I can meet about 25-33% of my spending needs from SS. Even when I have to take >4% from my 401k due to RMD's, I don't need to spend it all to meet my spending needs. Some of that money gets reinvested.

Second, I consider the risk that long-term care (LTC) will sharply reduce or deplete my resources. To reduce that risk, I buy long-term care insurance (LTCI). That eats into my annual income. But LTCI is "wealth insurance," reducing the chances that I will have to exhaust my own resources due to disability.

I think in the future the coming reductions in social security payments (according to current law) and what seems to be a trend toward much higher cost and less availability of LTCI may make those factors less significant going forward.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

I think that should be up there in the pantheon of spending plans
1) 4% rule (OK, not a real plan)
2) VPW
3) spend money, if you run out commit suicide?

There was no need to cut spending in 1972 despite the market crash. You could have taken out 4.5% and been fine. VPW cutting spending was an over reaction.That is the whole flaw in the system. It is easy to go conservative and never run out of money. But that isn't a free choice. You give up spending in your prime to get safety later. VPW opts for too much safety for me.

What I'm trying to say is that in 1974-1975 the investor did not know that it was OK to continue with higher withdrawals because 1981 would prove to be the start of an exceptional bull market, allowing one to spend (almost) freely during the market downturn with 20% inflation of the mid 1970s.

So, me, I'm fine with a conservative withdrawal method such as VPW which will protect the portfolio by adapting withdrawals to effective market returns. I know that I can reduce the nominal volatility of the portfolio with nominal bonds, and the inflation-adjusted volatility with inflation-indexed bonds (such as TIPS). Of course, the more bonds, the lower the withdrawal percentage; nothing is free.

Combining VPW withdrawals from a balanced portfolio with lifelong stable inflation-indexed income might not be perfect, but it's a good enough retirement approach for me.

Agree.

My own plan is the same. The 3 legged stool approach.

1/3 of retirement income from social security
1/3 from pension/annuity/tips-ladder
1/3 from my risk portfolio

"...people always live for ever when there is any annuity to be paid them"- Jane Austen

But many folks (most?) don't want to take that high a risk of running out of money.

Research has shown that retirees are more worried about running out of money than dying, a completely illogical concern but nonetheless a very real one.

Why is it an illogical concern - running out of money is something they will have to suffer through whereas death they won't.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

It is not illogical to recognize that most humans have difficulty taking their own life whereas relying on the ability to do so as your plan may be illogical.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

I think that should be up there in the pantheon of spending plans
1) 4% rule (OK, not a real plan)
2) VPW
3) spend money, if you run out commit suicide?

Suicide is a crime in many states. Promoting criminal activity is a no-no on many discussion forums, but I don't know about this one. I'm too new.

Buying CDs is illegal in several countries. Should we stop the discussion of it also?:) Suicide is "legal" in a majority of states. But the logic doesn't follow. I fear snakes more than dying in plane crash. Doesn't mean I want to die in a plane crash. People don't fear dying becuase it isn't something they can prevent/control.

But many folks (most?) don't want to take that high a risk of running out of money.

Research has shown that retirees are more worried about running out of money than dying, a completely illogical concern but nonetheless a very real one.

Why is it an illogical concern - running out of money is something they will have to suffer through whereas death they won't.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

It is not illogical to recognize that most humans have difficulty taking their own life whereas relying on the ability to do so as your plan may be illogical.

Feelings and logic are not the same. Quite often, the two are in opposition to each other.

What everyone views as funny and illogical about my statement is, in fact, pointing out how ridiculous it is to fear running out of money more than death because death is the worst possible outcome if one does indeed run out of money.

Remember that many people also fear public speaking more than death as well, which is even more illogical. Contrary to what have purported and built their theories around, homo economicus does not exist.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Suicide is a crime in many states. Promoting criminal activity is a no-no on many discussion forums, but I don't know about this one. I'm too new.

Buying CDs is illegal in several countries. Should we stop the discussion of it also?:) Suicide is "legal" in a majority of states. But the logic doesn't follow. I fear snakes more than dying in plane crash. Doesn't mean I want to die in a plane crash. People don't fear dying becuase it isn't something they can prevent/control.

Right. I'm not saying that anyone should commit suicide in any instance. I am merely pointing out that if it is true that someone fears A more than B, then B should be the preferred choice. That is very basic logic. I believe that when many state that they fear running out of money more than death that they are deluding themselves since if they actually did run out of money, I doubt that many, if any, would actually commit suicide.

I'm not saying that it is illogical to fear either running out of money or death. But fearing the former more than the latter is illogical.

The fact that many here are mocking this demonstrates, IMO, how illogical it actually is to fear running out of money more than death.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Research has shown that retirees are more worried about running out of money than dying, a completely illogical concern but nonetheless a very real one.

Why is it an illogical concern - running out of money is something they will have to suffer through whereas death they won't.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

It is not illogical to recognize that most humans have difficulty taking their own life whereas relying on the ability to do so as your plan may be illogical.

Feelings and logic are not the same. Quite often, the two are in opposition to each other.

Who said anything about feelings? Humans reluctance to take their own life is a chemical reaction as much as an emotional one - logical arguments most certainly need to account for that.

What everyone views as funny and illogical about my statement is, in fact, pointing out how ridiculous it is to fear running out of money more than death because death is the worst possible outcome if one does indeed run out of money.

No, we are pointing out that death isn't the worst possible outcome if one runs out of money - you are assuming one would be able to kill themselves and that assumptions is false. Beside ones own inability to do it one could be restrained by others from doing it and be pushed to living on permanent suicide watch in an asylum - personally I find that fate worse than death too.

Why is it an illogical concern - running out of money is something they will have to suffer through whereas death they won't.

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

It is not illogical to recognize that most humans have difficulty taking their own life whereas relying on the ability to do so as your plan may be illogical.

Feelings and logic are not the same. Quite often, the two are in opposition to each other.

Who said anything about feelings? Humans reluctance to take their own life is a chemical reaction as much as an emotional one - logical arguments most certainly need to account for that.

What everyone views as funny and illogical about my statement is, in fact, pointing out how ridiculous it is to fear running out of money more than death because death is the worst possible outcome if one does indeed run out of money.

No, we are pointing out that death isn't the worst possible outcome if one runs out of money - you are assuming one would be able to kill themselves and that assumptions is false. Beside ones own inability to do it one could be restrained by others from doing it and be pushed to living on permanent suicide watch in an asylum - personally I find that fate worse than death too.

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Suicide is a crime in many states. Promoting criminal activity is a no-no on many discussion forums, but I don't know about this one. I'm too new.

Buying CDs is illegal in several countries. Should we stop the discussion of it also?:) Suicide is "legal" in a majority of states. But the logic doesn't follow. I fear snakes more than dying in plane crash. Doesn't mean I want to die in a plane crash. People don't fear dying becuase it isn't something they can prevent/control.

Right. I'm not saying that anyone should commit suicide in any instance. I am merely pointing out that if it is true that someone fears A more than B, then B should be the preferred choice. That is very basic logic. I believe that when many state that they fear running out of money more than death that they are deluding themselves since if they actually did run out of money, I doubt that many, if any, would actually commit suicide.

I'm not saying that it is illogical to fear either running out of money or death. But fearing the former more than the latter is illogical.

The fact that many here are mocking this demonstrates, IMO, how illogical it actually is to fear running out of money more than death.

You are assuming that people top priority is avoiding fear. That is a flawed assumption.

I can be more afraid of running out of money than death.
I can also rather be alive and broke.

There is nothing illogical about some saying both of those things which is why thinking suicide is an solution to running out of money doesn't really fly.

In reality, few people run out of money. A lot of people end up with reduced lifestyles.

When picking a retirement rule, you need to decide what you want it to do and what risks you want. A inflation adjusted SPIA means you will never run out of money (which can happen with VPW or the 4% rule) until the insurance company fails. It is also very expensive in opportunity costs. You can use a VPW which means you will rarely (i.e. you live to like 110:)) run out of money but it makes no promises about the amount of money you get. You can use the 4% rule where you know how much money you are getting but not for how long. And you can blend them together to get a mix that works for you. All of the studies like the 4% rule are not ment to be followed religiously. Nobody is that crazy. What they do is tell that starting at 8% probably isn't a good idea:)

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Because people tend to be more greedy than fearful. Giving up all your money to an insurance company isn't as appealing as generating the same income and leaving your kids a pile of cash.

What is interesting is that when the default is the annuity (i.e. pensions), a lot more people keep it than go with the investment approach. Probably something like loss aversion (i.e. you never though of yourself as having a half million dollars. You thought of it as having 20k/year for live).

It's illogical because if you ran out of money, you could just end your life. If you fear living with no money more than death, then you should choose the latter. I don't say this to be morose; it's just logical.

It is not illogical to recognize that most humans have difficulty taking their own life whereas relying on the ability to do so as your plan may be illogical.

Feelings and logic are not the same. Quite often, the two are in opposition to each other.

Who said anything about feelings? Humans reluctance to take their own life is a chemical reaction as much as an emotional one - logical arguments most certainly need to account for that.

What everyone views as funny and illogical about my statement is, in fact, pointing out how ridiculous it is to fear running out of money more than death because death is the worst possible outcome if one does indeed run out of money.

No, we are pointing out that death isn't the worst possible outcome if one runs out of money - you are assuming one would be able to kill themselves and that assumptions is false. Beside ones own inability to do it one could be restrained by others from doing it and be pushed to living on permanent suicide watch in an asylum - personally I find that fate worse than death too.

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs?

That's a good question though I doubt it has anything to do with death. My guess is it is a combination of lack of awareness, lack of understanding the product and the role it can play, and mistrust of annuity products in general.

Though it is still in the future for me I am definitely contemplating the best way to create a safe floor and what role SPIA may play in that.

What is interesting is that when the default is the annuity (i.e. pensions), a lot more people keep it than go with the investment approach. Probably something like loss aversion (i.e. you never though of yourself as having a half million dollars. You thought of it as having 20k/year for live).

Kitces has a theory called the hierarchy of retirement needs that explains why retirees are so reticent to buy annuities. Some recent empirical research has provided some support for this theory as well.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

You are assuming that people top priority is avoiding fear. That is a flawed assumption.

That's a fair point. Regulatory focus theory states that people have a tendency to either be promotion oriented or prevention oriented. Promotion oriented people are primarily concerned with acquiring gains, whereas prevention oriented people are primarily concerned with avoiding losses. Presumably, prevention oriented people would place much greater emphasis on avoiding their fears than would promotion oriented people. Culture is a significant determinant of one's type of orientation, though there is a lot of variation in individuals' focus within a specific culture as well.

I still don't see how it's logical to fear running out of money more than death.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

The initial chance of success was precisely 94.9%, not 100%. If the original calculation gave a 100% success rate it would mean there is no risk of a failure. However since the success rate was 94.9%, that gives us a 5.1% chance of the strategy failing. Whilst the probability is small it is still possible. The 20% decline the year after is incorporated within those 5.1%, just as a potential market drop of ex. 80% the coming year which would lead to a greater probability of the strategy failing (going forward from that point in time), is incorporated within the failure rate.

It is of course true that when the market is overvalued there is a greater chance of failure and when the market is undervalued there is a lower chance of failure, however determining if the market is overvalued or undervalued is far from an easy task, and even if one is able to do so irrational markets can lead to continued overvaluation or undervaluation over long periods of time.

In the end, no strategy has 100% success rate and that is precisely why you should invest in accordance with your risk level, which in turn is determined (among other things) by how much you would be able to lose in a potential downturn

The initial chance of success was precisely 94.9%, not 100%. If the original calculation gave a 100% success rate it would mean there is no risk of a failure. However since the success rate was 94.9%, that gives us a 5.1% chance of the strategy failing.

People say things like this, but they are really misleading. The big problem is verb tense. Rather than "there is no risk of a failure" one could honestly say that "there was no risk of failure in the historical period studied". A belief that the past data projects accurately into the future is just that, a belief. It may be reasonable, may not be.

The initial chance of success was precisely 94.9%, not 100%. If the original calculation gave a 100% success rate it would mean there is no risk of a failure. However since the success rate was 94.9%, that gives us a 5.1% chance of the strategy failing.

People say things like this, but they are really misleading. The big problem is verb tense. Rather than "there is no risk of a failure" one could honestly say that "there was no risk of failure in the historical period studied". A belief that the past data projects accurately into the future is just that, a belief. It may be reasonable, may not be.

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

I think that is also a part of it.
But there are other parts as well....
- the payments can limit the flexibility you have with tax planning, taxes due
- its hard to imagine a best practice being handing over $100 and then getting back that same $100 with no extra over the next 14 + years ( one example only)
- some folks have a larger enough portfolio to make any advantages hard to realize

Annuities can be helpful in specific situations but the entire picture is not easy to see and calculate without extensive scenario comparisons.

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

For that reason, it's wise to not purchase a single annuity larger than the maximum that will be guaranteed by your state's guarantor association. If you have annuities with multiple companies, all guaranteed by your state's guarantor association, you have about the least risk you possibly can apart from a Federally guaranteed pension.

If multiple insurance companies all go bankrupt simultaneously and your guarantor association also goes bankrupt, then it's very possible that no income source will be safe, even dollars in an FDIC insured bank account.

Last edited by willthrill81 on Fri Nov 17, 2017 5:21 pm, edited 1 time in total.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

I think that is also a part of it.
But there are other parts as well....
- the payments can limit the flexibility you have with tax planning, taxes due
- its hard to imagine a best practice being handing over $100 and then getting back that same $100 with no extra over the next 14 + years ( one example only)
- some folks have a larger enough portfolio to make any advantages hard to realize

Annuities can be helpful in specific situations but the entire picture is not easy to see and calculate without extensive scenario comparisons.

It's true that annuities can limit your tax planning flexibility, but this is not normally a big problem.

Many retirement income experts, such as Wade Pfau, recommend some type of annuity to 'floor your income' (i.e. cover your necessary expenses between SS, pension, and/or an annuity).

If the reason someone is only taking 2% withdrawals is because they are fearful of running out of money, they would likely be well served by flooring their income with an annuity and then taking larger withdrawals from the remainder of their portfolio to pay for discretionary expenses. If they're taking 2% withdrawals because they genuinely don't want to spend more and want to leave behind a bigger nest egg to their heirs and/or charity than they started their retirement with, that's a different story.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

For that reason, it's wise to not purchase a single annuity larger than the maximum that will be guaranteed by your state's guarantor association. If you have annuities with multiple companies, all guaranteed by your state's guarantor association, you have about the least risk you possibly can apart from a Federally guaranteed pension.

If multiple insurance companies all go bankrupt simultaneously and your guarantor association also goes bankrupt, then it's very possible that no income source will be safe, even dollars in an FDIC insured bank account.

I think you offer some sound advice.

Sorry to be "that guy" and nitpick but i think all or pretty much all the state guarantee funds are not pre-funded, ie they don't actually have any money that they could run out of and go bankrupt. Instead they plan to assess the other companies operating in the state when and as they need to.

"...people always live for ever when there is any annuity to be paid them"- Jane Austen

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

For that reason, it's wise to not purchase a single annuity larger than the maximum that will be guaranteed by your state's guarantor association. If you have annuities with multiple companies, all guaranteed by your state's guarantor association, you have about the least risk you possibly can apart from a Federally guaranteed pension.

If multiple insurance companies all go bankrupt simultaneously and your guarantor association also goes bankrupt, then it's very possible that no income source will be safe, even dollars in an FDIC insured bank account.

I think you offer some sound advice.

Sorry to be "that guy" and nitpick but i think all or pretty much all the state guarantee funds are not pre-funded, ie they don't actually have any money that they could run out of and go bankrupt. Instead they plan to assess the other companies operating in the state when and as they need to.

Gold, guns and canned goods is the answer then? Heck, not even Social Security is "guaranteed", or so the courts have said. I guess we should all just go huddle in the corner and wait for the apocalypse/singularity/whatever wicked this way comes. I'm pretty cautious/conservative myself, but if we are getting to the point that FDIC insured money is being considered a real (rather than phantom) risk, um, time to hang it up...

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

For that reason, it's wise to not purchase a single annuity larger than the maximum that will be guaranteed by your state's guarantor association. If you have annuities with multiple companies, all guaranteed by your state's guarantor association, you have about the least risk you possibly can apart from a Federally guaranteed pension.

If multiple insurance companies all go bankrupt simultaneously and your guarantor association also goes bankrupt, then it's very possible that no income source will be safe, even dollars in an FDIC insured bank account.

I think you offer some sound advice.

Sorry to be "that guy" and nitpick but i think all or pretty much all the state guarantee funds are not pre-funded, ie they don't actually have any money that they could run out of and go bankrupt. Instead they plan to assess the other companies operating in the state when and as they need to.

That's very true; I didn't mean to insinuate that they were pre-funded.

My point was that if your guarantor association went bankrupt, literally meaning that they are unable to cover your annuity payments, you probably would have bigger problems on your plate.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

For that reason, it's wise to not purchase a single annuity larger than the maximum that will be guaranteed by your state's guarantor association. If you have annuities with multiple companies, all guaranteed by your state's guarantor association, you have about the least risk you possibly can apart from a Federally guaranteed pension.

If multiple insurance companies all go bankrupt simultaneously and your guarantor association also goes bankrupt, then it's very possible that no income source will be safe, even dollars in an FDIC insured bank account.

I think you offer some sound advice.

Sorry to be "that guy" and nitpick but i think all or pretty much all the state guarantee funds are not pre-funded, ie they don't actually have any money that they could run out of and go bankrupt. Instead they plan to assess the other companies operating in the state when and as they need to.

Gold, guns and canned goods is the answer then? Heck, not even Social Security is "guaranteed", or so the courts have said. I guess we should all just go huddle in the corner and wait for the apocalypse/singularity/whatever wicked this way comes. I'm pretty cautious/conservative myself, but if we are getting to the point that FDIC insured money is being considered a real (rather than phantom) risk, um, time to hang it up...

I agree. I would not be in the least concerned about the insurance companies making my annuity payments and my state's guarantor association all failing. But it's obvious that some people are. My point was merely that if that were to occur, it's very possible that a total economic collapse could be associated with that occurrence, in which case nothing is truly safe.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

If retirees truly feared running out of money more than death, then why aren't more buying guaranteed income through vehicles such as SPIAs? They might not guarantee a certain standard of living, but they do guarantee that you'll never run out of money.

Why should I believe in the guarantee given by some insurance company which may or may not honor that when the time comes?

I think that is also a part of it.
But there are other parts as well....
- the payments can limit the flexibility you have with tax planning, taxes due
- its hard to imagine a best practice being handing over $100 and then getting back that same $100 with no extra over the next 14 + years ( one example only)
- some folks have a larger enough portfolio to make any advantages hard to realize

Annuities can be helpful in specific situations but the entire picture is not easy to see and calculate without extensive scenario comparisons.

It's true that annuities can limit your tax planning flexibility, but this is not normally a big problem.

Many retirement income experts, such as Wade Pfau, recommend some type of annuity to 'floor your income' (i.e. cover your necessary expenses between SS, pension, and/or an annuity).

If the reason someone is only taking 2% withdrawals is because they are fearful of running out of money, they would likely be well served by flooring their income with an annuity and then taking larger withdrawals from the remainder of their portfolio to pay for discretionary expenses. If they're taking 2% withdrawals because they genuinely don't want to spend more and want to leave behind a bigger nest egg to their heirs and/or charity than they started their retirement with, that's a different story.

"It's true that annuities can limit your tax planning flexibility, but this is not normally a big problem."
I am not sure I would categorize it as a big problem but the results from various scenarios showed that they were significant. I would suggest that anyone considering varied possibilities take this affect into consideration especially a group such as this that measures the results of actively managed fees as significant... taxes can also be significant.
"If they're taking 2% withdrawals because they genuinely don't want to spend more and want to leave behind a bigger nest egg to their heirs and/or charity than they started their retirement with, that's a different story."
Yes

I agree. I would not be in the least concerned about the insurance companies making my annuity payments and my state's guarantor association all failing. But it's obvious that some people are. My point was merely that if that were to occur, it's very possible that a total economic collapse could be associated with that occurrence, in which case nothing is truly safe.

well put. it does sound a little alarmist doesn't it? I think not buying an annuity (within the state's limits of course) because one is worried about the state guarantee system would be silly.

These sorts of considerations are relevant to decisions being faced by many investors today. For example:

1) Should i take a lump sum and forgo my employer pension? (and maybe later i'll end up buying some sort of annuity...)
2) Should i take social security early or wait till i'm 70....
3) my employer is replacing my pension with an annuity from a private insurance company...

"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Someone correct me if I am wrong but isn't the 4% rule that you withdraw 4% of your starting portfolio's value adjusted for inflation each year. In other words if you start with a million dollar portfolio you can withdraw $40,000 each year adjusted for inflation. It seems like a lot of folks think it is 4% of their current portfolio's value which of course would be 100% safe since you would have 96% left each year after your withdrawal. The only problem is you might not have enough money to live off of if your portfolio had dipped in value because 4% of $100,000 is only $4,000..

IMHO, Investing should be about living the life you want, not avoiding the life you fear. |
Run, You Clever Boy! [9085]

Someone correct me if I am wrong but isn't the 4% rule that you withdraw 4% of your starting portfolio's value adjusted for inflation each year. In other words if you start with a million dollar portfolio you can withdraw $40,000 each year adjusted for inflation. It seems like a lot of folks think it is 4% of their current portfolio's value which of course would be 100% safe since you would have 96% left each year after your withdrawal. The only problem is you might not have enough money to live off of if your portfolio had dipped in value because 4% of $100,000 is only $4,000..

You are correct. It is a misunderstanding someone might have. This is confused by the fact that 4% of current portfolio is sometimes presented as a strategy. It is an option in Firecalc, for example.

Someone correct me if I am wrong but isn't the 4% rule that you withdraw 4% of your starting portfolio's value adjusted for inflation each year. In other words if you start with a million dollar portfolio you can withdraw $40,000 each year adjusted for inflation. It seems like a lot of folks think it is 4% of their current portfolio's value which of course would be 100% safe since you would have 96% left each year after your withdrawal. The only problem is you might not have enough money to live off of if your portfolio had dipped in value because 4% of $100,000 is only $4,000..

Someone correct me if I am wrong but isn't the 4% rule that you withdraw 4% of your starting portfolio's value adjusted for inflation each year. In other words if you start with a million dollar portfolio you can withdraw $40,000 each year adjusted for inflation. It seems like a lot of folks think it is 4% of their current portfolio's value which of course would be 100% safe since you would have 96% left each year after your withdrawal. The only problem is you might not have enough money to live off of if your portfolio had dipped in value because 4% of $100,000 is only $4,000..

This is the easiest ultimate variable safe withdraw rate.

It's true that it's impossible to run out of money with a fixed percentage withdrawal rate. The catch (there's always at least one) is that in a few historical periods, your portfolio and the corresponding amount of your withdrawal could get pretty small. According to FIRECALC, with a 70/30 portfolio, in the worst case, a $1M portfolio using a 4% fixed percentage would be worth an inflation adjusted $611k after 30 years, resulting in a withdrawal of only $24.4k, almost a 40% reduction from where they started.

Considering that retirees' spending, on average, drops 1-2% annually in real dollars throughout their retirement, this is probably not a huge drawback.

Another factor that changes significantly when using a fixed percentage withdrawal method is that, historically, the ending balance (and the corresponding withdrawals) has always been larger with higher stock allocations. This is different from the 4% plus CPI fixed withdrawal rate, where the historic rate of success has been highest with a stock allocation of around 70%; the rate of success has dropped slightly with higher allocations to stocks, even though the average ending balance has been higher.

Of course, with a higher allocation to stocks and using a fixed percentage withdrawal method, this is very likely to increase the variability in your withdrawals because your portfolio is likely to be more volatile. So you must decide whether a larger portfolio (and withdrawals) is worth the increased volatility of a higher stock allocation.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

^ how does RMD work with 4% SWR when most of our retirement assets are in IRAs?

You obviously can't withdraw less than your RMDs for tax deferred accounts. But keep in mind that if you're only withdrawing RMDs, that is actually a quite conservative approach (i.e. increasing percentage withdrawals based on life expectancy), even according to ultra-conservative Wade Pfau.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

^ RMD will exceed 4% at age ~72. We just hit 70 and RMD is 3.7X%.
So if one has most if not all of their retirement in Index/MF IRA and any transferred 401k to IRA, their RMD will eventually exceed the 4% while they had planned on 4% SWR. If they are OK with excess 4% in RMD and put that excess back into a taxable account, they would be OK. But knowing behavior aspects of having money in the bank, bank money is money essentially spent, moi.
YMMV

^ RMD will exceed 4% at age ~72. We just hit 70 and RMD is 3.7X%.
So if one has most if not all of their retirement in Index/MF IRA and any transferred 401k to IRA, their RMD will eventually exceed the 4% while they had planned on 4% SWR. If they are OK with excess 4% in RMD and put that excess back into a taxable account, they would be OK. But knowing behavior aspects of having money in the bank, bank money is money essentially spent, moi.
YMMV

It's perfectly fine to withdraw more than 4% at age 72 because a male's life expectancy at that age, according to SSA, is just under 15 more years.

Spending all of one's RMDs and no more is a very conservative withdrawal approach.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

^ how does RMD work with 4% SWR when most of our retirement assets are in IRAs?

Just because you withdraw it from your IRA doesn't mean you can't turn around and re-invest it in your taxable accounts. Doesn't the 4% rule just say you can spend up to 4% of your original portfolio's balance at retirement adjusted for inflation? Not seeing the connection between that and an RMD which is essentially having to recharacterized funds and pay any taxes due.

IMHO, Investing should be about living the life you want, not avoiding the life you fear. |
Run, You Clever Boy! [9085]

If one starts the 4% rule process early, at the RMD time, the person will likely withdraw more than 4% of the IRA part of the portfolio. But in any case, the other answers are correct, i.e., you don't have to spend all money withdrawn from your IRA accounts.

If one starts the 4% rule process early, at the RMD time, the person will likely withdraw more than 4% of the IRA part of the portfolio. But in any case, the other answers are correct, i.e., you don't have to spend all money withdrawn from your IRA accounts.

Exactly to the two above. Thinking one spends the RMD is part of the fallacy of falsely equating distributions with withdrawals and spending.

It is also true that the RMD formula is a conservative spending formula if the RMD were the withdrawal from the portfolio. IRA is also an undefined fraction of the total holdings. What fraction 4% inflation adjusted is of the current portfolio depends on how much the portfolio has grown or shrunk since retirement started. Those things combined means RMD rate has essentially nothing to do with 4% rules.